Lack Of Coordination Sets Stage For Regulatory Mayhem


By Anita Hawser


Anderson: Inconsistent regulation raises risks

It’s official. Political leaders across the G20 group of countries are ready to make the banks pay for the financial crisis. At the G20 summit in Toronto toward the end of June, leaders called for banks to hold more capital as a buffer against future losses. However, they left it up to individual countries to determine how they would toughen the rules. Experts have warned this could lead to regulatory arbitrage, with financial centers such as New York and London, which were hit hardest by the financial crisis, imposing more restrictive measures on banks, while other financial centers may take a more hands-off approach.

Commenting on the G20’s attempts to come up with a common set of rules for regulatory reform, Tony Anderson, banking partner at international law firm Pinsent Maso, says that without global cooperation on reform, the risk of regulatory arbitrage from inconsistent legislation looms large. Consequently, so does the risk of future banking failures triggered by this arbitrage.

Signs of the different regulatory approaches were already apparent in the run-up to the G2O Summit in Toronto. The US Congress passed a bill that imposed a levy on banks and hedge funds, limited the proprietary trading activities of banks and granted the US government powers to break up “systemically-important” institutions if they were failing. This goes a lot further than measures announced by the UK government. In his first budget as chancellor, George Osborne announced a bank levy which is expected to raise £2 billion ($3 billion.) Osborne did not go as far as the US in imposing a levy on hedge funds or in trying to limit banks’ proprietary trading activities.

Osborne went out on a limb imposing a levy on banks before other G20 countries had decided what action to take, and as Anderson points out, countries such as Australia, Japan and Canada, which did not suffer widespread banking failures, are opposed to internationally coordinated regulation. Other pundits also point to the economic costs of increased banking regulation (see story, right) and warn of the need to minimize the impact of regulation on the wider economy, particularly relating to banks’ ability to lend in order to drive growth.